What does asset allocation aim to achieve?

Asset allocation is a strategic approach to investment that involves distributing an investor's capital among different asset categories, such as stocks, bonds, real estate, and cash. The primary goal of asset allocation is to balance risk and reward by diversifying investments across various asset classes.

By effectively diversifying a portfolio, investors can mitigate risk while striving to achieve their desired returns. This approach acknowledges that different asset classes have varying levels of risk and return potential. For example, while stocks may offer higher potential returns, they also come with greater volatility. Bonds, on the other hand, generally have lower volatility, which can help stabilize an investment portfolio.

The idea is not to avoid high-risk assets entirely, as that would limit potential growth opportunities. Rather, the aim is to find a balanced mix that aligns with the investor's risk tolerance and financial goals. This is why the choice that focuses on mitigating risk and achieving desired returns captures the essence of what effective asset allocation seeks to accomplish.